Stockton to be largest US city to file bankruptcy

Associated Press

June 27, 2012

STOCKTON, Calif. — When Stockton becomes the largest U.S. city ever to file for bankruptcy, it will strike a hard blow to residents, especially city employees and retirees whose health benefits and pensions helped drive the city toward insolvency.

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City Manager Bob Deis said Tuesday that officials were left with little choice but to recommend bankruptcy after failing to hammer out deals with creditors to ease the city's $26 million budget shortfall.

Deis expects the city to file for Chapter 9 protection by Friday.

Stockton will join a number of other cities and counties across the nation that have plunged into financial crisis as the recession made it tough to cover rising costs involving current and former employees, bondholders and vendors.

“What's going on in Stockton is endemic to what's going on all over the state and the country,” said Michael Sweet, a San Francisco bankruptcy attorney at Fox Rothschild LLP. “Local governments are hurting and strained under the current pension and compensation systems. These systems are not appropriate for the type of economy this country has evolved into.”

At a standing room only Stockton City Council meeting Tuesday, numerous former city employees talked about their life-threatening medical conditions and said cuts to their health benefits prompted by the city's financial straits meant they would, in effect, lose their insurance.

“Some people will be devastated. There are those who have such severe medical problems that they will not be taken up by any medical company,” said Gary Gillis, a retired fire chief on the board of directors of the city retiree association. During the past three years, the city has dealt with $90 million in deficits in part through drastic cuts in police and fire personnel, even as residents said they have to deal with recurring break-ins and robberies, a climbing murder rate, homelessness and plummeting property values.

Once a beneficiary of the housing boom, the city now has the second-highest foreclosure rate in the nation. Its unemployment rate has doubled in the past decade and now hovers around 16 percent while a fifth of residents live below the poverty line.

Experts say municipalities such as Stockton must find a way to lower their contractual obligations to current and former employees as the cost of health care skyrockets and people are living longer.

“When times were good, it was easier to expand benefits and pensions and not pay as much attention to the unfunded liabilities that were growing,” said David Dubrow, a bankruptcy lawyer at Arent Fox LLP in New York City.